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Volume 13, Edition 15 | June 8 - June 14, 2024

Investors are Focusing on the Wrong AI

Doug Walters, CFA
We are increasingly fielding questions from investors wanting to invest in artificial intelligence. We tell them to focus on adaptable intelligence.
061424_INSIGHTS

Contributed by Doug Walters, David Lemire, Eh Ka Paw, Max Berkovich

Taxi drivers taking an interest in internet stocks was a telltale sign of the exuberance of the dot com bubble. Standing on any street corner you were likely to hear someone talking about a hot stock and someone else wanting to get in. We seem to be getting there with AI. That’s not to say we are in bubble territory. But every day, we are fielding questions about investing in AI from increasingly far-flung sources.

We are big believers in AI’s power to transform how we work and interact. Today alone, it assisted with writing this article and helped me streamline a spreadsheet. But when it comes to investing, we prefer a different type of AI – Adaptable Intelligence.

A frequent question is, “Do our strategies have AI exposure?”. Of course! It would be hard not to, with some of the biggest companies in the world dominating the space – NVIDIA, Microsoft… you know the cast of characters. But we find the question to be too narrow. Perhaps a better question is, “Do our strategies have exposure to trending opportunities, such as AI?” The answer again is “yes,” and the nuance is important.

Rather than focus solely on Artificial Intelligence, we prefer Adaptable Intelligence. Let me explain. We put funds at the core of our strategies that focus, in part, on Momentum stocks (i.e. stocks that are going up). These funds will pick up on emerging trends like AI and provide excess exposure to those stocks that benefit. Why adaptable? Because trends change. Today’s AI winners may not be tomorrow’s. Momentum ETFs will pick up on other market trends as AI exuberance fades. For that reason, Momentum funds are not a one-trick pony. Today, they are overweight AI, but they are also picking up other trends like exposure to weight loss drugs.

It is important to point out that Momentum does not always work. Enduring trends are required. For example, stock market leadership was erratic during the pandemic and the few years that followed. That was not a great environment for Momentum despite its strong historical record.

So, the next time you find yourself wondering about your investment exposure to AI, remember the real AI in investment: Adaptable Intelligence. It’s not just about investing in AI companies; it’s about embracing evidence-based investment practices that have shown over the long run that excess exposure to Momentum stocks has picked up emerging trends and enhanced portfolio returns.

3.4%

Core CPI Inflation

Core CPI fell from 3.5% to 3.4% this month. This was slightly lower than expected, giving markets a boost.

Headline of the Week

Once Bitten, Twice Shy

Rarely have so many discussed and debated such a small number (0.25%). One-quarter of one percent is the number for the Federal Reserve’s highly anticipated interest rate reduction. This anticipation reached a new high this week when, hours ahead of the Fed’s decision, the latest inflation report showed some good news as the headline number basically matched last month’s number and, more importantly, the core number came in below expectations. Below expectations inflation immediately translated into lofty expectations for a rate cut (if not two) before year-end.

The Fed was late with interest rate increases when inflation leapt higher, and now, they are hesitant to act without more concrete evidence that inflation will move to their 2% target. The Fed Chief acknowledged that this latest inflation report was good news, and that they would like to see a clearer pattern emerge, and they would not put too much weight on one month’s report. Despite Fed projections hinting at only one rate cut this year, Wall Street is keeping hope alive for two. With four meetings this year and a few more inflation reports before the all-important September meeting, two cuts cannot be definitively ruled out, but it seems like a lot would have to fall into place quickly.

The Week Ahead

We had a rate decision and an inflation print this past week. After that, next week will be significantly less exciting. With a holiday-shortened week in the States, most of the attention will be on the United Kingdom.

A Distraction

With the Bank of England (BoE) due for a rate decision next week, odds are they will stay pat.

  • The main reason is the election scheduled for the 4th of July.
  • Elections so close to the meeting are most likely a relief for central bankers as they get more time to assess inflation and have cover to do nothing for a little longer.
  • The May consumer price index (CPI) in the UK is also out on Wednesday.
  • Current assigned odds place a 40% probability of a cut in August.

Tightening Belts?

US retail sales this week is the marquee economic release.

  • Between a hot jobs report and a cool inflation report, coupled with a hawkish Federal Reserve, the market is looking for direction, and the consumer may be a good gauge.
  • If consumers are tightening their belts, inflation may keep coming down. However, economic activity may as well.
  • So, a Goldilocks report is needed. Retail sales were flat in April, and May’s forecast is that they will have expanded a fraction.
  • The other economic releases include some manufacturing data and existing home sales.

Holidays

  • Wednesday is Juneteenth, and the markets are closed.
  • This Sunday is also a holiday. Happy Father’s Day to all the dads!

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